K-pop label SM taps activist investor as board member

K-pop behemoth SM Entertainment Co. said on Jan. 20 it has decided to tap Lee Chang-hwan, the CEO of local activist fund Align Partners Capital Management, as a board member in a bid to improve its corporate governance.

It will mark the first case for an activist investor to become a board member of a South Korean company that has a principal shareholder. SM Entertainment founder and ex-chief producer Lee Soo-man is the largest shareholder with 18.46% ownership; he was excluded in the decision-making process for SM's governance restructuring, sources said.

The K-pop pioneer will choose four external directors, including one non-executive director, and three other seats reserved for internal members at the general meeting of shareholders in March, sources said on Sunday. Currently, SM's board is comprised of one outside director and three inside directors.

The K-pop label will set up a committee to oversee its business contracts with outside companies. Last year, SM canceled business contracts with Like Production, a boutique firm wholly owned by founder Lee, as Align called for the termination of transactions between the two companies. 

FOUNDER LEE'S INFLUENCE TO DIMINISH

SM will also introduce a multi-producing system, encouraging more music professionals to be listed on its K-pop stars' music production credits. The music label has heavily depended on founder Lee for most of its entertainment products. 

The K-pop pioneer also said it will return a minimum of 20% of its net income to shareholders for the next three years. SM, which made a debut on the junior bourse Kosdaq in 2000, started dividend payouts last year with a total of 4.7 billion won ($3.8 million), or 200 won per share.

Align said it won't file a shareholder derivative suit against the boardroom of SM and will cooperate with the board to enhance the K-pop label’s corporate governance and shareholder value.

The activist fund, founded in 2021 by CEO Lee who had managed private equity at KKR & Co., holds just around a 1% stake in SM. Align has mustered individual stakeholders to join its proxy contest against the K-pop label to create a transparent governance structure.

Among SM's key shareholders are National Pension Service (NPS) with 8.96% and KB Asset Management Co. with 5.12%. Market watchers say key shareholders are unlikely to support founder Lee in maintaining the current governance structure.

SM's stock rose 8.2% to close at 83,100 won on Friday.

The last case that an activist investor became a Korean company's board member took place in 2006, when New York hedge fund Steel Partners chief Warren Lichtenstein was elected as tobacco maker KT&G Corp.'s outside director. Unlike SM, the cigarette company doesn't have a principal shareholder -- the largest stakeholder is NPS with an 8.03% ownership, and much of its stake is held by foreign institutional investors.

Updated with the case of KT&G

Write to Jun-Ho Cha and Ji-Eun Ha at chacha@hankyung.com
Jihyun Kim edited this article.